Cathay Pacific Needs to Get in the Low Cost Carrier Game

Cathay Pacific has had years to watch low cost airlines steal share from European legacy carriers. Asia has been a little behind Europe, but it's increasingly clear that Asian travelers also demand cheap flights with few frills. Cathay needs to give customers what they want, or it will be in trouble.
-Brian Sumers

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Other airlines have invested in low cost offshoots, but not Cathay Pacific. That may be a mistake, a Bloomberg columnist warns. Cathay Pacific

Skift Take: Cathay Pacific has had years to watch low cost airlines steal share from European legacy carriers. Asia has been a little behind Europe, but it's increasingly clear that Asian travelers also demand cheap flights with few frills. Cathay needs to give customers what they want, or it will be in trouble.

— Brian Sumers

What’s Europe’s most profitable airline?

Air France-KLM, whose premium passengers sleep in private suites with memory-foam mattresses, dine on Joël Robuchon dishes and have private jets at their disposal? Or Ryanair Plc, which offers flights starting at 10 euros ($11) and whose chief executive officer has mused about charging passengers for toilet visits?

No prizes for guessing it’s Ryanair. Trailing 12-month operating margins at the Irish budget carrier run at 23 percent, compared with 4.8 percent at Air France and 6.9 percent at Lufthansa AG. They have a bare-bones image, but discount airlines are where the best money is made. Of the world’s 10 most profitable airlines by operating margins, only Alaska Air Group Inc. and Delta Air Lines Inc. are full-service carriers.

There’s a lesson in that for Asia’s once-mighty full-service operators, Singapore Airlines Ltd. and Cathay Pacific Airways Ltd. Both have been relatively late to the discount-aviation party, and are now carrying out strategic reviews to address the threat from state-owned airlines in China and the Gulf.

Budget carriers were until relatively recently a smaller presence in Asia than in Europe and North America. Now they’re indisputably a major part of the future. Survival may depend on embracing the concept.

Singapore Air has been the most forthright in adopting this change. Its Tiger Airways budget offshoot was established back in 2004, with the long-haul discount carrier Scoot following in 2012. The eponymous main carrier’s share of group capacity fell to 76 percent last year, from 95 percent five years earlier.

Despite missteps and a delayed integration between Tiger and Scoot, discount flying as a whole is starting to pay off: SIA’s budget carriers have posted profits for six consecutive quarters. Absent earnings from them and SilkAir, the shorter-haul brand, the group as a whole would have reported a loss in fourth-quarter results announced Thursday.

While Singapore Air has been running to meet the future, Cathay Pacific has been standing athwart history, yelling Stop. It doesn’t have a budget line, and when Qantas Airways Ltd. and China Eastern Airlines Corp. attempted to set one up in Hong Kong in 2012, the result was a two-year regulatory battle that eventually sent the foreigners packing.

While Hong Kongers constantly moan about the high cost of Cathay’s tickets, the only local low-cost carrier seeking to undercut the incumbent is Hong Kong Express, ultimately controlled by mainland takeover monster HNA Group Co.

That conservatism worked well enough for Cathay in the past, but the tide can’t be halted. Already, travelers from Hong Kong to Southeast Asia can fly Tiger and Scoot, as well as AirAsia Bhd., Cebu Air Inc., and Qantas’s Jetstar affiliates. Jetstar is competing with ANA Holdings Inc.’s Peach and Vanilla Air on Japan routes, while Spring Airlines Co. and Juneyao Airlines Co. vie with HK Express to serve mainland China. Cathay is well on its way to posting a second consecutive year of losses; SIA, for all its travails, has made a profit every year since at least 1990.

Cathay’s newly crowned CEO Rupert Hogg would do well to learn from that comparison in addressing the carrier’s predicament. The long-haul routes where it’s traditionally dominated are looking increasingly like a lost cause, given the growing muscle of Chinese and Gulf airlines.

Regional routes are the best hope for sustained profits, and low-cost carriers are inevitably going to be fierce rivals there, too. Cathay can’t beat the competition — so it should take a leaf from Singapore Air’s book, and join it instead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.